How Geopolitics Affect Energy Investing

You may not be an expert on geopolitics and how they relate to energy and natural resources, but you’ve definitely seen them in action. If you’ve heard of Russia threatening to cut off European access to natural gas, or read about Venezuelan oil, or seen headlines about Iran’s nuclear program or the Organization of the Petroleum Exporting Countries’ (OPEC’s) influence on oil prices, then you’ve witnessed how geopolitics influences energy.

The main reason for this is that energy resources aren’t distributed evenly among countries. Nations that have abundant energy resources inevitably use them for political control or to improve their influence on the world stage. There are companies who were permitted to operate in a country one day and then were kicked out and had their assets taken by the government the next day.

This is the risk companies take when dealing with sovereign countries that control large deposits of oil, gas, coal, and uranium.

Consider Iran nationalizing the Anglo-Iranian Oil Company (now BP) in 1951, which led to the creation of OPEC in 1960, which led to the Arab oil embargo and the 1973 oil crisis. Or consider the nationalization of the oil industry in Venezuela in 1976, where all foreign companies were replaced with Venezuelan companies. You can see how that era affected oil prices in this figure.

You can’t completely eliminate the risks associated with geopolitics. One way to manage them is to invest in larger international oil companies that have the experience and diversification to overcome geopolitical challenges rather than investing in smaller companies, which aren’t as well equipped to do so.